Created September 15, 2009
While courts are willing to enforce covenants not to compete, judges will construe the terms of those covenants strictly, against the employer. Only “reasonable” provisions will be enforced since covenants not to compete inhibit the freedom of trade. Therefore, it is important to carefully craft any covenant with the assistance of legal counsel so that it will withstand scrutiny of the courts.
The most important consideration in drafting a covenant not to compete is to identify what the particular needs of your business are. Where do you compete for business? What is the exact nature of your business? What are the duties of the employee who will be signing the covenant, and what kind of trade secrets or other private information does he or she have access? This is important because the courts will only enforce “reasonable” covenants, and will ask these three questions to determine if a given covenant is reasonable:
- 1. Is the restraint, from the standpoint of the employer, reasonable in the sense that it is no greater than necessary to protect the employer in some legitimate business interest?
- 2. Is the restraint, from the standpoint of the employee, reasonable in the sense that it is not unduly harsh or oppressive in curtailing his or her legitimate efforts to earn a livelihood?
- Is the restraint reasonable from the standpoint of good public policy?
For the first question, the court will look closely at the nature of the employer’s business. An employer clearly has a legitimate business interest in areas that are within its business practice, but not for areas that are beyond its practice. For example, a company that builds airplane engines and nothing else has a business interest in the market for airplane engines, but not other parts of the airplane, like the wheels.
When considering whether the covenant is unduly harsh on the employee, the court will look to whether the covenant makes it unreasonably difficult for the employee to be employed. A television station that seeks to prohibit its employees from working for any other television station in the United States would be seen as unduly harsh.
Finally, in terms of public policy, the court will look at the effect the covenant will have on the public, and whether the restriction is modest enough to not offend the public interest in free trade and competition. Protecting trade secrets and confidential client lists for a limited time are sufficiently important interests, for example, while forbidding employees from working for your competitors for the rest of their lives is not.
Ultimately, “reasonableness” is a balancing act between the three different kinds of restrictions that covenants not to compete offer: the duration of the restriction, the size of the geographic area where the restriction applies, and breadth of activity to be restricted. The broader any one of these restrictions is, the more narrow the others will need to be in order for the covenant to be reasonable, and all three will be assessed within the perspectives of the employer, the employee, and the general public.
In general, courts find reasonable those covenants that restrict an employee from engaging in the same kind of work he or she performed for the employer in the geographic area the employer does business for a period of two years after termination. Courts are also willing to enforce prohibitions on former employees soliciting current employees, or business clients, for the same period. However, the facts and circumstances of your business may require broader protection in one area than another.
The Virginia Supreme Court, in New River Media Group, Inc. v. Knighton, 245 Va. 367, 429 S.E.2d 25 (1993), upheld a covenant against an employee disc jockey wherein the employee could not join a competing radio station within 60 air miles of the employer’s broadcast station for twelve months after termination. The radio station evidently decided that it was willing to make the covenant enforceable for only one year instead of two in order to make sure that the coverage area was suitably large to protect the station. In Advanced Marine Enterprises, Inc. v. PRC, Inc., 256 Va. 106, 501 S.E.2d 148 (1998), the same court upheld a covenant that prevented former employees, for a period of eight months, from “rendering competing services to” or “solicit[ing] any customer of [the employer] for whom Employee performed services while employed by [the employer], within 50 miles of [any of the employer’s] office[s],” even though the employer had over 300 offices worldwide. The duration and breadth of activity were narrow enough to allow the broader geographic scope to be reasonable.
Covenants not to compete that do not specify a duration, a geographic area, or the particular activities at issue will typically be read as though being unlimited in nature, and thus unreasonable restraints on trade. Ambiguities in noncompete agreements will also be read against the employer and in favor of the employee, making it much more likely that the covenant will be found to be unreasonable. Thus it is critical to draw clear restrictions on each aspect of the covenant.
Should any part of a covenant not to compete be deemed unreasonable by a court, the tendency in Virginia has been to not enforce the entire covenant. This makes it all the more important that each covenant be carefully drafted. Since the covenant is a contract like any other, it is typical to include a severability provision so that if one part of the covenant is unreasonable, the other parts may still be enforced. Virginia courts have been reluctant to honor such clauses, however.
Before drafting a covenant not to compete, it is recommended that you consult legal counsel.
This article was written by James N. Markels, Esq., and Merritt J. Green, Esq., of General Counsel, P.C., in McLean, Virginia. Copyright, 2007, all rights reserved.